For many companies in the medtech and diagnostic sectors, identifying the next source of capital is high on the board’s agenda. While a significant number opt to secure their next round of financing from venture capital firms, there is an alternative source of capital that is becoming increasingly popular.
The London Stock Exchange’s Alternative Investment Market (AIM) offers access to a supportive, high-quality investor base within a flexible regulatory regime that allows companies to go public at a much earlier stage than would normally be expected for a listing in the US. In the life sciences sector, medtech and diagnostic companies that have secured FDA approval, are generating revenue, and ideally have international aspirations, are all potential candidates to raise money via AIM.
This article explains the opportunity it provides and why several North American companies have looked to AIM to raise money.
What Is AIM?
AIM was launched in 1995 by the London Stock Exchange as an international growth market for small and medium-sized companies to help them access capital from the public markets. Since its launch, more than 3,800 companies from around the world have traded on AIM, raising nearly £112 billion (approximately $144 billion) in funds.
Companies on AIM operate in over 100 countries and represent 40 different sectors, ranging from financial services to healthcare and technology. As of the end of December 2018, 89 of 922 companies trading on AIM were in the healthcare industry and they collectively raised over £480 million (approximately $617 million) on AIM during the period between January and December 2018.
Why list on AIM?
The London exchanges are inherently international in their outlook and there are more international companies listed in London - including approximately 120 North American companies - than on any other exchange. There is a particular opportunity for North American companies to take advantage of this route at the moment; in 2017 there were 21 North American (US and Canada) listings, five times the 2016 number. Several US-based healthcare companies, including Maxcyte (Maryland), Polarean Imaging (North Carolina), and Renalytix AI (New York), have raised money on AIM in the last 24 months.
The principal benefits for companies listing on AIM include the following:
- access to long-term growth capital from a diverse, international, and high-quality institutional investor base The institutions that invest through AIM are typically blue-chip investors with a focus on smaller growth companies. Examples include Invesco, Standard Life, BlackRock, Hargreaves Landsdown, and Schroders, among others. There is also a pool of tax-driven investors that can invest on AIM using the UK’s Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) regimes, which benefit from various reliefs and incentives for investments into qualifying companies. The AIM investor base also tends to support the needs of growth companies and recognises that follow-on investments will likely be required. For example, over the last five years, more than half of the newly public companies have accessed additional equity capital in follow-on transactions. Some companies are able to take advantage of this very effectively. For instance, Maxcyte listed in March 2016, raising £10 million from its IPO, and has since carried out placings in May 2017 and February 2019 to raise an additional £20 million and £10 million respectively.
- the ability to secure financing while retaining strategic and operational control of your business In order to list, the company’s capital structure will typically need to revert to common stock, so it is likely that there will be an element of pre-IPO restructuring to effect this, particularly if the company already has institutional investors. It is also highly unusual for public market investors to take a board seat.
- a cost-effective and balanced regulatory regime tailored to the needs of growing companies The costs of listing and of remaining on market are significantly less than the usual costs involved in a US IPO. For example, it is possible to list the Delaware company stock directly (through depositary interests) and for those companies to report under US generally accepted accounting principles (GAAP). There are no Sarbanes-Oxley reporting requirements with which to comply, and companies are only required to report their results semi-annually (see below). The regulatory regime applicable to listing companies is also relatively flexible and gives latitude, for instance, for M&A activity without having to revert to shareholders, other than where further equity funding would be required or the transaction would otherwise constitute a reverse takeover.
- a flexible and de-risked listing processThe UK listing process allows for investor feedback from the outset of the IPO process and deal research is usually published. There is also no regulatory review feature; instead, the nominated advisor, or ‘Nomad’, has to sign off on the admission document to the exchange. This means that the entire process can remain confidential until the company is confident the deal will close. As such, companies tend to get regular feedback throughout the IPO process as to how successful they will be when it comes to closing the fundraise. This, in turn, means that UK IPOs usually price within the range set forth at the beginning of the bookbuilding process.
- a lower legal risk environmentIn general, the UK is a less litigious environment than the US, and this is reflected in the number of lawsuits brought against companies that have recently gone public in the US versus in the UK. It also generally results in associated cost savings for directors and officers insurance.
Life on AIM
AIM companies are required to appoint and have a nominated adviser (Nomad) at all times. The Nomad is responsible for ensuring that the listed company complies with the AIM rules. In turn, Nomads are regulated by the AIM exchange.
An AIM company must prepare and publish annual audited accounts. The accounts must be prepared under international financial reporting standards (IFRS) for companies incorporated in the European Economic Area (EEA), but issuers incorporated in the US may choose to adopt and report under US GAAP. An AIM company must also prepare and publish half-yearly reports. There is no requirement for AIM companies to publish quarterly financial reports.
Management and corporate governance
In order to carry out a UK listing, the company will need to consider its existing board structure and may need to appoint additional directors to make it suitable for a listing. In general, and depending on the size of the company, it is likely that the company will need to have at least two independent, non-executive directors appointed. At least one member of the board is also likely to need to have prior UK listing experience and be resident in the UK for investor access.
Where there is one or more shareholder who has a significant interest in an AIM company, the company will usually enter into a relationship agreement with the shareholder(s) that will set forth how the company will be run and govern the relationship between the parties while the company is admitted to trading on AIM. This can demonstrate that the company has good corporate governance, will be run for the benefit of shareholders as a whole, and consequently is appropriate to be trading on AIM. Although there is no hard and fast rule on when a shareholder is deemed to be ‘significant’, anyone who holds (or is interested in) 30 per cent or more of the share capital of the company will likely be considered to have a significant interest.
Duty of disclosure
AIM companies have a general duty to disclose without delay any inside or price-sensitive information. In addition, AIM companies must announce the following: (i) details of substantial transactions and related party transactions; (ii) reverse takeovers; (iii) fundamental changes of business; (iv) changes in directors, holdings of significant shareholders, Nomad, and broker; and (v) changes in accounting reference dates, legal name, and registered office address.